Halloween XVIII: A Nightmare on Downing Street

“In a country battered by austerity, only one man has the power to reshape the tax system, slay the evil tech giants, tell truly terrible jokes and save the economy from destruction and debt. That man is…Fiscal Phil.”

Like all horror movies, good and bad, Halloween XVIII starts with the killing of a beautiful starlet. That starlet is personal service companies in the private sector whose benefit will be massively reduced, following reforms introduced to the public sector in 2017. The onus will now be on companies which engage with individuals working through such companies to determine whether they are self-employed or not. Rightly or wrongly, this will add complexity and cost to engaging with such individuals, particularly if they are able to increase their charges to compensate for additional tax and National Insurance Contributions.

In the movie’s second scene, Fiscal Phil attacks capital gains tax entrepreneur’s relief with a blunt instrument. The result is calamitous for employee shareholders who do not hold 5% of the economic rights available to all ordinary shareholders. The measure will have serious implications for many holders of growth shares and shareholders in companies with value from previous transactions or fundraisings stored in shares with preferential rights. The other entrepreneur’s relief headline is that the qualifying period has been extended from 12 months to two years. Fiscal Phil’s need for baddies to slay is such that these changes are described as preventing abuse of the relief and, to emphasise this, the changes to the required equity rights apply from today, rather than being introduced after consultation on 5 April next year.

Having slayed these twin evils, Fiscal Phil is able to save the day by increasing tax relief for capital expenditure whilst making much needed changes to the intangible assets regime (generally applying to trades commenced after 1 April 2002) to bring it into line with the chargeable gains regime for older trades. The screams of those losing entrepreneur’s relief may be partially offset in the movie’s final scene by the relief of companies looking to hive down and sell trades commenced since 2002.

As the final credits roll, we present the outtakes, the scenes which weren’t quite able to make the final cut. This is a horror movie for many viewers rather than the end of “The Cannonball Run” but, hopefully, there is a little cheer for many of our clients and the hope that the jokes will return for Halloween XIX.

Scene 1: The death of personal service companies

What the measure is

The government has announced that it will consult during 2018 on how to tackle non-compliance with the rules on “off payroll working” (IR35) rules in the private sector. This consultation will feed into the draft Finance Bill legislation which will be published during summer 2019. The new measures will apply to large and medium sized businesses, and those businesses affected will have until April 2020 to implement the changes. The existing rules will continue to apply to small businesses.

The IR35 rules act to deem payments made to individuals providing services through a personal service company (“PSC”) to be employment income if the engagement has the characteristics of an employment. If this is the case then currently the PSC has to operate PAYE and operate on the income received. The government is aiming to ensure that individuals who work as if they were employees are actuallytaxed as employees, irrespective of whether they structure their work through a company.

The rules were changed for the public sector with effect from 6 April 2017 as it was considered that they were not operating effectively. The public sector rules changes shifted the responsibility for operating PAYE and NIC from the PSC to the engaging party. HMRC estimates that the public sector reform has raised around £550 million in income tax and NICs in its first year and the government is therefore keen to introduce similar reforms to the private sector.

What this means for you

If your business engages or pays PSCs for the services of individuals then you could be affected, as it is the engaging business that will be responsible for deciding whether the individual whose services are provided by the PSC should be treated as an employee going forward.

From 6 April 2020 medium and large businesses will need to decide whether the rules apply to an engagement with individuals who work through their own company. Where the rules do apply, the business paying the PSC will need to deduct income tax and employee NICs and pay employers’ NICs. This will result in additional administration and risk for the engaging business, as a result of which many businesses may decide that it is easier to put people on the payroll.

Of course, an additional tax burden for individuals trading through PSCs will affect their lifestyles and so additional tax costs, as well as an additional administrative burden, may be passed on to many companies.

Scene 2: A vicious attack on Capital Gains Entrepreneurs’ Relief

Part 1 – Additional 5% tests to qualify for the relief

What the measure is

Entrepreneurs’ Relief is a preferential capital gains tax rate of 10% available to individual shareholders who own at least 5% of a company’s ordinary share capital and at least 5% of the voting power in the company.

Two additional tests have been introduced, with immediate effect: In addition to giving the holder at least 5% of the votes, the ordinary shareholding must also give at least:

5% of the company’s distributable profits available to ordinary shareholders; and

5% of assets in a winding up.

What this means for you

Any share structure which involves more than one share class should be reviewed carefully now if any of the shareholders intend to claim ER on a future disposal.

This applies especially to structures involving growth shares or preferred ordinary shares, or any structure where certain shares are either entitled to no dividends or return on a winding up, or alternatively where a share class has preferential dividend or winding up rights.

Part 2- increase in qualifying period from 1 year to 2 years

What the measure is

In order to be eligible for Entrepreneurs’ Relief under the current rules, an individual must meet certain qualifying conditions for a continuous period of 1 year prior to making a disposal.

For disposals from 6 April 2019 onwards, the qualifying period is being extended from 1 to 2 years.

What this means for you

For a shareholder in a private trading company/group, the main conditions are that the shareholder must (a) be a director or employee, and (b) have a 5% shareholding, throughout the relevant period prior to disposal.

The extension of the qualifying period from 1 year to 2 years (together with the other changes to Entrepreneurs’ Relief noted above) will make it even more important to ensure the desired shareholding structure is in place at least 2 years in advance of any intended disposal.

Scene 3: The evil menace is lifted with incentives for capital expenditure

What the measure is

The Annual Investment Allowance, which effectively gives 100% first year allowances, will increase for a temporary two-year period (1 January 2019 to 31 December 2020) from £200,000 to £1,000,000 per annum. The new limit applies to groups of companies, so that corporates can decide how the £1,000,000 can be split between group members.

Secondly, a new 2% straight line deduction will be introduced for new non-residential structures and buildings under the new Structures and Buildings Allowance. This is likely to encourage development of commercial property and make the ownership of such properties more attractive.

However, 100% first year allowances will end for energy and water efficient plant and machinery and writing down allowances will fall from 8% to 6% on long life assets, integral features and other such assets.

What this means for you

Overall, this is good news. The temporary two-year increase in the annual investment allowance to £1,000,000 pa from £200,000 is a significant benefit and the cost of new non-residential commercial buildings will now be given tax relief over fifty years. Many companies may feel that reductions on the allowances available for fixtures and fittings will be a price worth paying for these changes.

Scene 4: The evil menace returns in a reduced form to slightly limit research and development tax relief

What the measure is

With effect from 1 April 2020, there will be a new limit on the amount of payable tax credit that can be claimed by a company under the R&D SME tax relief. The limit will be set at three times the company’s total PAYE and National Insurance contribution payment for the period.

What this means for you

We anticipate that this will have limited impact. This is only likely to affect those companies who have a small workforce but who make large use of third-party contractors.

Scene 5: A lucky escape for pensions tax relief

Pensions tax relief has been chased since the Halloween franchise began. Like a heroine hiding in a dark room, pensions relief stayed still as Fiscal Phil peered in, saw no sign of life and moved on. We shall see whether pensions relief survives Halloween XIX.

Fiscal Phil reaffirmed the retention of capital gains tax exemption for the family home. However, he has announced an intention to consult on changes to ancillary provisions relating to the relief.

Firstly, the exempting of any gain which relates to a period whilst the family home is let out is to be restricted to circumstances where the owner is in shared occupancy with the tenant – this mirrors similar changes proposed in relation to Rent-A-Room Relief but which are now not going to be pursued.

Secondly, the final period exemption which was designed to cover the period of ownership during which the home is vacant whilst waiting to be sold is to be reduced from its current eighteen months to nine months.

What this means for you

The changes tolettings relief will mean that relief of up to £40,000 of chargeable gain will only be available in more restricted circumstances. Secondly, any gain attributable to a period longer than nine months will be chargeable but subject to the annual capital gains tax exemption (which increases to £12,000 for tax year 2019/2020). The final period exemption will only be a quarter of what it used to be in 2013/14 and earlier,although the 36 month period remains for disabled persons or those in care homes.

Scene 7: Non-UK domiciled individuals and Excluded Property Trusts

What the measure is

Trusts established by individuals when they were non-UK domiciled are exempt from UK inheritance tax as their non-UK situs assets are excluded property. HMRC take the view that assets added to such trusts once the individual has become UK domiciled, or deemed domiciled, no longer benefit from excluded property status and intend to legislate accordingly.

What this means for you

Inheritance tax charges will accrue on such assets following the enactment of next year’s Finance Bill even when the additions were made prior to that date.

Scene 8: The final confrontation, as the intangible fixed assets regime is significantly improved in two ways

Corporate intangible fixed assets regime – ‘acquired goodwill’

What the measure is

The government will reform the corporate intangibles regime, which was first introduced on 1 April 2002 and created a distinction in the treatment between pre and post 2002 intangible assets.

Restrictions were introduced in 2015 for purchased goodwill and customer-related intangibles, whereby amortisation deductions for goodwill were denied. A deduction was instead given for the cost of these assets at the time of disposal, which is similar to treatment under the capital gains regime.

This tax and accounting difference makes the UK less favourable when compared with other jurisdictions. The government will therefore partially reinstate relief for acquired goodwill in the acquisition of a businesses with eligible intellectual property.

What it means for you

Depending on the scope of the relaxation, when details become available, this measure will allow some improved relief for newly-acquired intangible assets.

Corporate intangible fixed assets regime – de-grouping charges

What the measure is

When it was introduced in 2002, the regime mirrored many provisions in the chargeable gains regime. In 2011, changes were made such that, in a share sale, any capital gains de-grouping charge (where assets have been transferred to a subsidiary within six years of it leaving the group) is incorporated into the gain or loss on the share disposal. This means that if the gain on the disposal of the shares is otherwise exempt, for example because the substantial shareholding exemption (SSE) applies, the de-grouping charge is also excluded from the charge to tax.

However, there remained an anomaly between the treatment of intangible assets on disposal of assets and goodwill created after 2002 and those created before. The rules for intangible assets will now be brought in line to mirror the capital gains de-grouping rules.

What it means for you

This would mean that SSE would be available to exempt de-grouping gains that arise on intangible assets created after 2002 as a result of a share disposal. The changes to the de-grouping rules will be effective for de-groupings occurring on or after 7 November 2018.

Combined with the changes for amortisation of certain goodwill, this will cause many buyers and sellers to reconsider how to structure deals